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'No End In Sight:' Boris Johnson's Brexit Prep Breaks The Pound, No-Deal Scenario Likely

'No End In Sight:' Boris Johnson's Brexit Prep Breaks The Pound, No-Deal Scenario Likely

Britain’s new Prime Minister Boris Johnson is standing by his promise that the U.K. must leave the European Union by Oct. 31 — with or without a deal in place.

Capital Economics' chief markets economist John Higgins said much has been made of sterling’s poor performance recently, and the fact that it is close to the weakest it has ever been in nominal trade-weighted terms.

“This [sterling weakness] masks the fact that the currency’s valuation still does not look particularly low on any of the usual fundamental measures. That means it is hard to make a very positive case for the currency in the medium- to long-term, whatever happens on the Brexit front,” Higgins said in a Capital Economics note.

Sterling On A Slippery Slope

Johnson is promising that Brexit will take place in October “do or die,” which means the potential risk of a hard Brexit increases, as does the downward pressure on the pound sterling.

On Wednesday, FXTM market analyst Han Tan said that, although the sterling managed to bounce off the $1.212 support level against the U.S. dollar, the weakening bias for GBP/USD remains clear amid intensifying concerns over a no-deal Brexit.

“With just three months remaining before the Oct. 31 Brexit deadline, the hardline stance employed by new U.K. Prime Minister Boris Johnson has done little to assuage concerns that the U.K. will avoid crashing out of the EU without a deal,” Tan said. 

The political dialogue between the U.K. and the EU is expected to continue as the Johnson administration takes brinkmanship with the continent to another level.

'There Is No End In Sight'

“The British pound is now the second-worst performing currency in the entire world," said Nigel Green, the CEO of deVere Group.

"There is no end in sight to the embattled British pound’s plight, with both the current Prime Minister Boris Johnson and the leader of the official opposition, Labour Leader Jeremy Corbyn, promoting policies that will deliver fresh — and serious — blows to the currency." 

Johnson is ramping up no-deal preparations, and it looks increasingly likely the U.K. will crash out of the EU in a no-deal scenario in October, he said. 

"Even though this has largely been priced-in by the markets, there can be no doubt that it has also intensified uncertainty and, in response, the already weak pound fell and continues to flounder." 

Prepare For No-Deal Brexit 

Should the U.K. leave the EU with no deal, the sterling can be expected to remain weak for several years until the country and the bloc readjusts, Green said. 

"A low pound is, of course, bad news for British holidaymakers and travelers abroad, with trips to Europe and the U.S. [becoming] increasingly expensive. Even destinations such as Dubai and China are more expensive, as their currencies are pegged to the U.S. dollar." 

Another key issue is that one of the U.K.'s most important sectors, financial services, will suffer from another hit to the pound, he said. 

"It will be a hit because it is built on foreign investment that puts its faith in a strong pound.”

Price Action

The iShares MSCI United Kingdom Index (NYSE: EWU) was down 1.17% at the close Thursday, while the Vanguard FTSE Europe ETF (NYSE: VGK) was down 0.39%. 

Related Links:

Boris Johnson Will Be The Next UK Prime Minister

How Weakness In The British Pound Could Impact S&P 500 Earnings


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